Restructuring 2017

Last verified on Tuesday 16th May 2017

Colombia

Felipe Cuberos
Philippi Prietocarrizosa Ferrero DU & Uría

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?

  2. As a general rule, directors and officers may not be found liable for the mere fact of operating a company with financial difficulties. However, under Colombian law, a company will be deemed to be in "cause for dissolution" whenever it suffers losses which reduce its net worth below 50 per cent of its subscribed capital and in such cases, although no insolvency proceedings become mandatory, directors must refrain from engaging in new operations, and summon a shareholders’ meeting in order to inform this situation. Shareholders in their turn may either recapitalise the company or undertake a private liquidation. 

    If directors and officers fail to give notice to the shareholders of said situation, or engage in new operations, they may be found jointly and severally liable in the event that damages are caused to the company, the shareholders or third parties.

    On the other hand, shareholders are not generally liable before creditors except when they have used the company in a fraudulent or abusive manner.

  3. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 

  4. Creditors may initiate an executory proceeding (ie, a collection claim before a judge) in order to force debtors to perform a certain obligation, whether monetary or otherwise.

    In the course of such processes, creditors are allowed to request some precautionary measures, preventing debtors from divesting assets. Such measures may include a judicial order or even a seizure of property to prevent the debtor from selling or transferring its assets. 

    In addition to the foregoing, if a secured creditor has obtained security over a moveable asset, such creditor may be entitled to directly foreclose the asset (ie, without a judiciary proceeding) to take it as his or her own property or to pay its credit with the product of the asset’s sale, depending on the rules set forth in the security agreement.

  5. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?

  6. The answer to this question will depend on the nature of the collateral involved. Whenever the obligation is guaranteed by means of a mortgage, which is only applicable to real estate, foreclosure will always imply a judicial proceeding, in the course of which it will always be necessary that the judge orders an auction to ensure that the sale or foreclosure generates the maximum amount of proceeds possible.

    Under this scenario, the collateral will be under control of a delegate appointed by the judge during the execution proceeding. Nevertheless, creditors are forbidden to gain ownership over the collateral itself other than through a purchase in the auction on which they may offset the purchase price against the debt.

    Other types of guarantees may have a different treatment under Colombian law. For instance, whenever a trust is created (either with moveable property or with real estate assets) for security purposes, the trustee (which is a financial institution) will issue guarantee certificates to creditors, under which their credits will be secured with the underlying assets placed in trust. In case of default, the trustee will sell the asset privately in accordance with the rules set forth in the trust agreement, which will rarely imply judicial intervention. In this case, it is possible for the creditor to gain ownership over the underlying asset without need of an auction, by simply requiring the trustee to follow procedures set forth in the contract.

    In addition, for security interests created on movable property, there are certain rules generally applicable that allow lenders to take possession, control or even ownership over the assets under procedures set forth in the contract.

    Finally, stay of individual collecting actions (including those related to foreclosure and similar rights for secured creditors) occur when an insolvency proceeding commences, unless (i) the assets involved are not necessary to run the debtor’s business in the ordinary course, or (ii) the insolvency proceeding is a judicial liquidation rather than a reorganisation. In case of judicial liquidation, however, individual rights can be exercised only over movable assets for a direct repayment of debts, except if those assets are needed to attend pension-related obligations. 

  7. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 

  8. Yes, but this is not automatic and depends on specific rights to be given to lenders under the security agreement. 

  9. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?

  10. During the normal course of business (ie, without being in an insolvency proceeding), the creditor is free to sell the secured asset (unless it has been seized) to any person, even to the secured creditor. In this last case, payment of the purchase price could be offset against the secured debt. Nonetheless, Colombian law does not set forth any preference in favour of the secured creditor in order to purchase the relevant asset.

    On the other hand, during the course of insolvency proceedings a creditor does not have credit-bidding rights explicitly set forth under Colombian law, but a distinction shall be made:

    Under reorganisation proceedings, as general rule, any set-off or sale of assets conducted after the initiation of the proceedings would have to be previously authorised by the Superintendency of Companies. Therefore, any credit-bidding operation would have to be reviewed and decided upon by the Superintendence as bankruptcy judge, until the reorganisation agreement is confirmed. Once confirmation occurs, assets can be freely transferred by the creditor again, unless otherwise provided in the reorganisation agreement. 

    Under a judicial liquidation, credits have to be covered with the product of the sale of the debtor’s assets. All outstanding assets and the product of the sold goods will be subject to an asset adjudication agreement, under which the latter will be distributed among the creditors pursuant to the statutory credit priority ranking and in this scenario, credit bidding would be contrary to the equality and universality principles governing Colombian bankruptcy law. Notwithstanding the foregoing, a secured creditor may take the asset as payment, provided that the exercise of such right does not harm pensioner’s rights.

  11. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 

  12. Yes. If the lender is to acquire a company whose business is a competing business or within the same value chain of his or her own, then antitrust filings can be required. Also under certain circumstances the granting of security by an insolvent debtor or even the re-payment of its debts (either upon the enforcement of security or otherwise) may be revoked in the context of insolvency proceedings. 

    Formal proceedings

  13. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?

  14. Insolvency proceedings for legal entities in Colombia are regulated by Law 1116, 2006 (Law 1116). Pursuant to the terms of Law 1116, there are two types of bankruptcy proceedings available for legal, private-owned companies: reorganisation and judicial liquidation.

    • The reorganisation proceeding aims to preserve viable businesses and to normalise their credit and commercial relations by restructuring their operations, administration, assets and liabilities.
    • The judicial liquidation proceeding pursues the prompt and orderly liquidation of a non-viable company, through the sale of its assets.
    • Pursuant to article 2 of Law 1116, individuals who are professional merchants, are subject to the regime set forth thereof. Non-merchant individuals’ insolvency is governed by the provisions contained in Title IV of section III of Book III of the Colombian General Procedural Code and by Decree 2677, 2012. 
    • There is an out-of-court restructuring proceeding that may be exercised by debtors, by means of which a debtor negotiates directly with its creditors without the intervention of the insolvency court but under similar terms and conditions applicable to reorganisation proceedings, in order to reach an agreement to reorganise its business, which has to be validated by a bankruptcy judge to be enforceable with the same privileges of a formal reorganisation proceeding (stay of actions and others). 
  15. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?

  16. Yes, but what normally happens is that the government commences those proceedings ex oficio under the form of a “forced liquidation” which in general terms is the same insolvency proceeding used for financial institutions and many other debtors subject to special bankruptcy provisions. 

  17. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 

  18. The commencement of an insolvency proceeding shall be grounded on either (i) a “cessation of payments’ or (ii) an “imminent payment default”.

    A company or individual will be in a cessation of payments whenever it is in default of at least two or more obligations with two or more creditors, for more than 90 days; or when two or more creditors have initiated two or more collection proceedings against such company. In each of said events, the amount of obligations must represent no less than 10 per cent of the debtor’s liabilities.

    The company will be in an imminent payment default whenever it can be demonstrated the existence of adverse situations in the respective market or in its organisation or structure, that materially affect or that will reasonably materially affect payment when due of its short-term liabilities (one year or less).

    Admittance into a reorganisation proceeding under a cessation of payments may be requested by the debtor, or by one or more creditors to whom the debtor has defaulted, or by the superintendency that supervises the debtor or the debtor’s activities. 

    In the case of an imminent payment default, the reorganisation proceeding may be initiated by the debtor himself or a plural number of external creditors with no connection to the debtor or its shareholders. 

    The above are the grounds for either a voluntary or an involuntary proceeding. In case of an involuntary proceeding, there are no special risks or liabilities of any kind to the creditor or creditors that requested commencement of an insolvency proceeding on any given debtor, and no bond needs to be posted.

    On the other hand, a judicial liquidation procedure shall commence whenever there is a breach of the reorganisation agreement by the debtor, or upon any grounds for immediate judicial liquidation set forth in Law 1116, which include the abandonment of the debtor’s business and the request from: (i) the debtor acting on its own, (ii) the debtor along with the creditors that represent 50 per cent or more of the debtor’s liabilities, (iii) the authority that holds surveillance or control powers over the debtor, or (iv) a foreign representative or authority.

  19. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 

  20. As a general rule, there are no effects on the subsidiary or affiliate of a Colombian company if a filing for insolvency is made, and therefore affiliates are able to choose whether or not to join the process. Nevertheless, the first exception to this rule is that, pursuant to article 105 of Law 1116, if a foreign company that filed for insolvency abroad and which bankruptcy process has been recognised under the Colombian cross-border insolvency regime, has a Colombian branch, local bankruptcy proceedings would be initiated regarding said branch. Also, whenever the insolvency of a company threatens to put any of its affiliates in a position of inability to satisfy its obligations as they mature, the Superintendency of Companies, which is the insolvency court, may order the commencement of an insolvency proceeding of the affiliate.

    Furthermore, there is a legal presumption whereby insolvency is deemed to have been caused by parent companies, whenever subsidiaries enter into a reorganisation process. In those cases, however, the parent might be able to demonstrate that insolvency of the subsidiary has been caused by reasons different from the control exerted by it. 

    Colombian law allows simultaneous filing for insolvency between related parties, as well as the possibility to request coordination between related parties’ insolvency procedures.

    Furthermore, when it comes to related parties, within a judicial liquidation the Superintendency of Companies can order the substantial consolidation of patrimonies belonging to companies under a same corporate group, provided that: (i) assets and liabilities of the corporate group subject to judicial liquidation are entwined in such a way that their separation would entail unjustified costs or delays; and (ii) if consolidation is required in order to rectify any fraud or unjustified activities that hinder or prevent the judicial liquidation. Such consolidation can either be decided upon in an ex officio manner or upon request from any member of the group, its corresponding insolvency judge or a creditor.

  21. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 

  22. Insolvency proceedings do recognise the rights of all creditors. When the judge admits a company into an insolvency proceeding, its legal representatives are required to inform the initiation of the proceeding to all of the company’s creditors. Furthermore, the judge must send communications to the Tax Administration and to the Ministry of Labour. The decision of the judge admitting the debtor to insolvency must be made public by registration with the local chamber of commerce, and also with the chamber of commerce corresponding to each place where the debtor has branches.

    Although in a reorganisation there is no legal requirement for the lenders to present their credits, when filing the request for insolvency, the debtor is required to list each of its creditors. In the event that any given creditor is not mentioned in said list, it is entitled to object it in order to be accepted and included as part of the insolvency proceeding. In the objection the creditor has to demonstrate, by any means of proof showing that there are pending obligations in his favour.

    Finally, when insolvency is not aimed to reorganisation but rather to judicial liquidation, the non-mandatory nature of credit filing is maintained. Nevertheless, the insolvency judge shall elaborate the list of creditors, if proceedings were initiated under “immediate” grounds or update the list prepared in the reorganisation stage, when liquidation is reached upon breach of the reorganisation agreement. In any case, notice of an objection to such a list of creditors would be governed by the same rules applicable to the reorganisation stage.

  23. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?

  24. There are no differences between creditors. As it has been recognised by the Superintendency of Companies, all credits – including contingent ones, regardless of whether they are outstanding – must be included by the debtor in its creditors’ list. Contingent creditors may object to the creditors’ list in order to be included in it as regular creditors are.

    Inter-company credits will be satisfied only after all third party creditors have been satisfied. No precedents exist of a challenge to this rule. 

  25. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?

  26. As from the filing of the reorgansation petition the debtor cannot, without previous authorisation from the judge overseeing the corresponding collection proceeding: (i) amend its by-laws; (ii) grant collaterals or pay collateralised debts, including those under trust agreements; (iii) make payments, compensations or withdrawals within, or terminate, ongoing proceedings; (iv) settle obligations that arose before the filing of the reorganisation petition; (v) transfer assets or enter into transactions which are not in furtherance of the debtor’s ordinary course of business.

    Immediately upon the judge’s decision approving entry into a reorganisation proceeding, a stay on all collection actions and proceedings against the debtor will apply automatically. Such stay prevents the commencement or continuance of any enforcement action or collection proceeding pursued by individual creditors against the debtor.

    As a result of the automatic stay (i) all collection proceedings initiated prior to the commencement of the reorganisation will be suspended and all creditors shall bring their claims within the reorganisation proceeding; (ii) the debtor’s claims and objections in said collection proceedings shall be treated by the judge as objections to the credits within the reorganisation process; (iii) any precautionary measures issued under said collection proceedings may be either maintained or lifted by the judge, as it deems convenient for the purposes of the reorganisation process; (iv) all creditors will be subject to the creditor ranking and priority of payment as generally set forth in Colombian bankruptcy and civil laws; and (v) no new collection proceedings may be initiated against the debtor outside the insolvency proceeding. Any act that does not comply with the aforementioned rules will be declared null and void by the judge overseeing the corresponding collection proceeding. 

    As a general rule, contracts to be performed during an extended period of time cannot be terminated by reason of the initiation of insolvency proceedings aimed to reorganisation, except in the event of a post-filing breach of contract. The debtors may request from the judge termination of continuous performance contracts (but may not terminate by themselves) whenever they are found to be excessively onerous, prior cost-benefit study. This study shall include termination penalties and the study of the economic conditions of contracts of the same type.  

  27. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 

  28. During the insolvency process, certain acts or deals performed by the debtors can be challenged before the bankruptcy judge, when said acts (i) have caused damage to any of the creditors, (ii) have affected the priority order for payments, or (iii) have affected the property that constitutes the debtor’s assets so that those assets are insufficient to cover the total amount of credit acknowledged.

    Therefore, any act that implies the transfer, disposal, constitution of cancellation of encumbrances, limitation or division of debtor’s property, carried out in detriment of the equity, or any gratuitous loan contracts that hinder the objective of the process, that have been agreed within a period of 18 months prior to the initiation of the insolvency process, can be challenged when it appears that the buyer, lessee or bailee have not acted in good faith.

    Also, any act for no consideration conducted by the debtor within a period of 24 months prior to the initiation of the insolvency proceeding or any bylaw amendments agreed upon voluntarily by the shareholders which have been formalised and registered with the commercial registry of the Chamber of Commerce within a period of six months prior to initiation of insolvency proceedings can be challenges, when those acts result in a reduction of the debtor's assets to the detriment of the creditors, or in modifications to the shareholders’ liability regime.

    Any revocation action can be filed by any of the creditors, the promoter of the insolvency (who is a “facilitator” between the company and its creditors during a reorganisation), or the liquidator, up to six months after the date in which the qualification and graduation of credits and voting rights become final. The action will be processed as a summary procedure according to procedural laws, and the plaintiff bears the burden of the proof.

    The filing of these actions are most frequent on insolvency proceedings of greater relevance.  

  29. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?

  30. The initiation of a reorganisation proceeding or mandatory liquidation process will interrupt all ongoing foreclosing processes against the debtor. Pursuant to Law 1116, all foreclosure processes must be interrupted and forwarded to the bankruptcy judge in order to protect the assets of the debtor and to ensure the compliance with the priority of credits. Furthermore, under Law 1676 of 2013, enforcement of guaranties over the goods can be authorised by the bankruptcy judge if such assets are not necessary for the continuity of the debtor’s course of business. 

    Therefore, liens and securities will lose their preferential treatment and their guarantees will be put on hold until the reorganisation plan is consummated; consequently they will not be able to seek remedies outside such plan, so long as the debtor is in compliance with it.

    Nevertheless, secured creditors will undoubtedly have an advantage in the creditors’ list, because they will be placed in priority ranking (second or third, depending on the nature of the guarantee), which must be respected for all purposes in the reorganisation plan.

    The effect of this provision is that if the reorganisation plan fails, securities will be re-established. If a mandatory liquidation follows, the ranking will be honoured in furtherance thereof.

    In order to make liens and guarantees effective, it will be necessary that the reorganisation plan specifically opens this possibility, and that the plan is approved by an absolute majority of admissible votes, plus the vote of the secured creditor.

    Under an “adequate protection” approach, Colombian law states that, if the secured assets are subject to depreciation, the debtor can request the promotor or the judge, as applicable, to adopt the measures required in order to protect the relevant creditor’s position, which may include the substitution of the secured asset for an equivalent good or periodic payments to the creditor to compensate him for the asset’s loss of value. 

  31. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?

  32. Secured and unsecured creditors are treated equally in a reorganisation, except for the fact that if the process ends up being a mandatory liquidation, then secured creditors will keep their priority for payment according to legal priority rankings.

    In addition, the members or shareholders of the debtor company are considered as "internal creditors" within the creditor categories to vote for the approval of the reorganisation agreement.

    Equity holders will be entitled to recover after all external liabilities have been paid. 

  33. 17.

    What is the effect of an insolvency proceeding on current and retired employees?

  34. Insolvency proceedings will not have, per se,any effect on current and retired employees. Employees’ credits will receive special treatment during reorganisation and will be placed as first class creditors on the creditor ranking list. 

  35. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?

  36. No adverse consequence arises in principle. However, the company’s administrators and shareholders can be disqualified to exercise trade activities for up to 10 years, whenever certain events or conducts, which basically refer to fraud, are present. 

  37. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 

  38. Priority orders in Colombia refer to five ranking classes of creditors, as follows (among others): (i) labour and tax credits; (ii) pledge holders; (iii) mortgage holders; (iv) suppliers of raw materials for production or transformation of goods or the rendering of services; (v) all external and unsecured creditors.

    Although generally the effect of these priority orders is that creditors will be paid in an orderly manner if the proceeding turns out being a liquidation and that no creditor may be above employees and pensioners, claimants with lower priority may receive special treatment under a reorganisation plan only if the creditors accept such changes with a majority of 60 per cent and no harm is caused to creditors with a higher priority.

  39. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?

  40. Foreign creditors are treated equally to local creditors by reason of the non-differential treatment established in the Colombian Constitution.

  41. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?

  42. Within four months following the decision of the judge regarding the approval and recognition of existing credits, the creditors and debtor must submit to the judge the reorganisation agreement duly approved either by

    • a majority of creditor votes where at least (i) three out of five credit categories are represented by the affirmative votes, or (ii) in the event that only two or three categories are involved in the proceeding, two of the credit categories are represented; or
    • otherwise 75 per cent of the total creditors’ votes, without taking into account creditor categories. For these purposes, creditors are not categorised by reason of priority but rather according to the type of credit involved. There are five credit categories or voting groups (labour, governmental, financial institutions, internal creditors and all other external creditors).

    The reorganisation agreement must include all the debts recognised by the judge in the proceeding and all creditors can be crammed down, but secured creditors can only lose their privilege if they grant their affirmative vote for such purpose.

    After the agreement is approved by the creditors with the above-described majorities, the judge will schedule a hearing for the confirmation of the reorganisation agreement. In this hearing creditors may present their observations to the reorganisation agreement, and the judge will decide on its legality. Such decision will be rendered during the hearing, and is not subject to appeal. If the reorganisation agreement is not accepted by the judge, the debtor will have eight business days to correct it with the creditors’ approval. If the judge does not confirm the reorganisation agreement, it will then order the dissolution of the debtor, and order the negotiation and execution of an asset adjudication agreement setting forth the manner in which the debtor’s assets are going to be assigned to the creditors and the debtor will liquidate its operations.

  43. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?

  44. During the course of reorganisation, creditors are entitled to sell their claims and the buyers will have the same treatment that the sellers had.

  45. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?

  46. The Superintendency of Companies is the specialised bankruptcy judge for the insolvency proceedings regarding companies and branches of foreign entities, and its decisions are not subject to appeal, but can be referred to the courts to ensure the constitutional protection in case of violations to due process. For non-merchant individuals, the bankruptcy judge shall be the non-specialised civil judge of the circuit from the debtor’s principal domicile, and its decisions can be appealed.   

    The process promoter, has the role of a judicial assistant for facilitating the process, and is designated by the bankruptcy judge at the commencement of an insolvency proceeding, from a list prepared by the Superintendency of Companies. According to a recent law, however, and with the view to save costs, the company’s manager or CEO may be appointed as promoter.The promoter is an individual who is in charge of coordinating the reorganisation proceeding but does not in itself manages the debtor’s business, since directors and officiers normally keep their posts during the process unless there is a just cause for removal, which normally refers to fraud. The promoter has duties such as examining and rendering his opinion on the reorganisation project, studying the company’s feasibility, and directing creditors and debtors in finding the best option to attain the reorganisation proceeding’s objectives, among other functions. At any time, the debtor, in joint agreement with a majority of creditor votes, may replace the promoter designated by the Superintendency of Companies as judge, by another from the list prepared by the said Superintendency.

    The law provides that a creditors’ committee must be included in the reorganisation plan to be voted, and defers to the parties thereto to determine its actual functions, so long as such functions do not imply administering or co-administering the company.

    The insolvency proceedings under Law 1116 do not permit competing reorganisation plans, as only one reorganisation agreement shall be presented by the debtor and it must be duly approved by the creditors in a hearing before being submitted to confirmation by the insolvency judge. At this hearing, creditors may present observations to the plan, but not a new one.

  47. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?

  48. Upon filing a request for reorganiation, and unless they have a prior, express and clear authorisation by the bankruptcy judge, officers are further required to refrain from creating or making effective guarantees or precautionary measures that encumber the debtor’s assets. However, new financial arrangements can be made during the process.

    The Law provides some preference and benefits to creditors granting such financing, consisting in the inclusion of said lenders as first-class creditors, and therefore, (i) they may share on a pro-rata basis their credit position with tax authorities; (ii) they are supposed to be paid first than all others; and (iii) if there is a breach by the debtor, these creditors may ask for mandatory liquidation.

  49. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?

  50. No special treatment is included in this regard.

  51. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?

  52. From the date of filing of a reorganisation petition, debtors and creditors are required to refrain from performing offsets, unless they obtain a prior, express and clear authorisation from the Superintendency of Companies acting as bankruptcy judge. There are no mechanisms allowing creditors to recover expenses.

  53. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?

  54. Debtor will be able to retain and use such losses after emerging from the reorganisation proceeding because it will remain as the same individual or legal entity and thus it will be the same taxpayer. 

  55. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?

  56. A reorganisation proceeding shall terminate upon (i) compliance of all obligations set forth in the agreed reorganisation plan; (ii) non-compliance (breach) of the plan; or (iii) failure to satisfy administrative expenses or social security payments.

    Except for the case of compliance, termination of the reorganisation proceeding will imply the opening of a judicial or mandatory liquidation. Discharge would occur only if after the debtor’s liquidation no further assets exist to cover pending liabilities.

    There are no limitations to file for another insolvency proceeding after termination of a previous insolvency proceeding, provided that such termination did not imply liquidation of the debtor, but the judge will consider the previous insolvency to evaluate the admittance of a new reorganisation plan, or if the debtor should go directly to liquidation.   

  57. 29.

    How long do restructurings last? Is there a formal deadline?

  58. There is a deadline for submitting the reorganisation plan to the Superintendency of Companies, which has to be approved by the majority of creditors within four months from the definition of the credits admitted and their corresponding voting rights by the said Superintendency. If no agreement is reached within this period, a debtor will be taken into liquidation and the Superintendency, acting as insolvency judge, will award its assets to the creditors according to the five ranking classes explained above. 

    In general, reorganisation proceedings last between 12 and 18 months from the initial filing up to the final approval of the plan, but there is no specific timeline set forth in the law for performing the plan, which will finally depend on what is agreed between the creditors. 

  59. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?

  60. There is an out-of-court restructuring proceeding that may be used, by means of which a debtor negotiates, under similar terms and conditions applicable to reorganisation proceedings, with a plural number of creditors equal to the majority required by the Law to enter into a reorganisation agreement, in order to design and agree on a reorganisation plan. This agreement shall be authorised by the Superintendency of Companies as reorganisation judge, whose main obligation is to review whether all requirements of a formal reorganisation agreement are included and, additionally that credits are classified accordingly. If as a result of the validation process, the Superintendency judge authorises the agreement, it shall have the same effect as the one granted to a reorganisation agreement.

    This out-of-court proceeding, or validation process as it has been conceived in the Law 1116, is not uncommon, but nowadays parties are being more inclined to formal proceedings. Its primary benefits are the avoidance of judicial proceedings and confrontation with the creditors. The major drawback is that, until the judge validation, the negotiation is not subject to the same prerogatives of a reorganisation proceeding, and specially, that the stay of actions will only operate at the end when the agreement is recognised. 

    Additional considerations

  61. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?

  62. Yes. Although the Superintendency of Companies acts as an insolvency judge during the process, it is an administrative body, which is part of the government. As a specialised entity on these matters, the Superintendency usually sets guidelines and policies for the handling of insolvency proceedings, and this goes far beyond its role as insolvency judge.  

  63. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?

  64. Colombia has adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission for International Trade Law (UNCITRAL), and this is contained on Title III of Law 1116. Regulations in said Title shall be applicable to cases where: (i) a foreign tribunal or a foreign representative requests assistance in Colombia pertaining to a foreign proceeding; (ii) assistance is requested in a foreign state concerning a proceeding carried out pursuant to Colombian regulations relative to insolvency; (iii) simultaneous Colombian and foreign proceedings proceedings are under way vis-à-vis the same debtor; or (iv) creditors or other interested parties located abroad are interested in requesting for initiation of proceedings, or to participate in ongoing proceedings, pursuant to Colombian regulations relative to insolvency.

    Therefore, the person in charge of the administration of the reorganisation proceeding in a foreign country may submit a request for recognition of an extraterritorial process. These proceedings will be recognised if (i) debtors are insolvent, (ii) the extraterritorial proceeding is currently in process and, (iii) the person in charge of the administration of the proceeding is duly authorised to represent the proceeding.

    It is possible to conduct parallel insolvency proceedings in both Colombia and another country. The difference will be whether the main proceeding is conducted in Colombia or in a different jurisdiction. If the main proceeding is conducted abroad, then there is an obligation for Colombian authorities to help coordinating the process by making hearings, taking affidavits, and controlling assets. Colombian authorities will also take care of the internal applicable proceedings.

  65. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?

  66. Since the entry into force of Law 1116 in 2006 until March 2017, 34 per cent of the liquidation proceedings have commenced due to the failure and/or breach of a reorganisation plan or their equivalent under prior bankruptcy regimes. Nonetheless, failed reorganisation agreements under the current regime that ultimately led to judicial liquidation only represent 11 per cent of all reorganisation proceedings conducted under Law 1116.

    Therefore, the insolvency regime has been highly successful in terms of preservation of viable businesses under reorganisation schemes. These results have been possible due to the professionalisation and specialisation of the Superintendency of Companies as bankruptcy judge. 

  67. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?

  68. The insolvency proceeding carried out before the Superintendency of Companies is a single-instance process, therefore, its decisions are not (generally) subject to appeal, but can be referred to the courts to ensure the constitutional protection in case of violation of due process.

  69. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?

  70. There are no known precedents on techniques used by debtors to manipulate or control insolvency proceedings. 

  71. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 

  72. Colombian Insolvency Regime has not been unrelated with global events. For example, back on 2013, the Law of Secured Transactions was issued, which aims to facilitate the access to credit and a more efficient collection, even within an insolvency process.  

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Questions

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?


  2. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 


  3. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?


  4. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 


  5. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?


  6. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 


  7. Formal proceedings

  8. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?


  9. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?


  10. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 


  11. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 


  12. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 


  13. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?


  14. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?


  15. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 


  16. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?


  17. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?


  18. 17.

    What is the effect of an insolvency proceeding on current and retired employees?


  19. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?


  20. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 


  21. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?


  22. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?


  23. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?


  24. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?


  25. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?


  26. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?


  27. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?


  28. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?


  29. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?


  30. 29.

    How long do restructurings last? Is there a formal deadline?


  31. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?


  32. Additional considerations

  33. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?


  34. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?


  35. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?


  36. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?


  37. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?


  38. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 


Other chapters in Restructuring 2017

  • Brazil
    TozziniFreire Advogados TozziniFreire Advogados (Brasilia) TozziniFreire Advogados (São Paulo)
  • Colombia
    Philippi, Prietocarrizosa & Uría
  • Dominican Republic
    Headrick Rizik Alvarez & Fernández
  • Mexico
    Cervantes Sainz